The Australian Small Business Blog

Wednesday, December 04, 2013

Discounting or Average Pricing


by Dr Greg Chapman

Everyone (including me) says discounting is a bad idea if you are using it as a way to increase gross profit through sales volume. For example, if your gross profit is 30% and you offer a 20% discount, you will have to double your sales, just to break even. It also creates a reputation for your business that your prices are negotiable. Not a great strategy.

Most people discount when they see their stock just sitting on the shelves and then they panic, but what if you planned to discount from the start. What might such a plan look like?

Let’s say the product cost you $30. Keeping the arithmetic simple, you decide to sell it at $100, a 70% margin. You don’t expect to sell many at this price, perhaps 10% of your overall sales. Next you decide to announce a 15% discount to your customers as part of a ‘mid season’ sale. You expect to sell 30% of your stock at this price. Remember, by having priced it at $100 initially, the 15% discount seems like good value, with the initial price being an anchor point.

Finally, you offer the product at your ‘end of season’ sale at a massive 40% off where you expect to clear the remainder. Of course at this price, you still have a 50% margin and over the whole season, you have achieved a 58% margin.

Does this strategy create a reputation as a discounter? Not if there are ‘good reasons’ for the discounting which don’t include ‘you can’t pay your bills’. Such reasons might include a new model or end of financial year sales.

The discounted value is relative to the significantly higher initial price that you set as a reference point. Your focus is on achieving the average price target you have set, and discounting is the tool you use to achieve it!

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Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.



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4 comments :

Hospitality Supplies said...

Hey Greg,

It really is such a fine line between discounting, increasing turnover and maintaining profit. We are in a competitive and commoditised niche and sell online. I find our customers are price sensitive. If our prices are high they don't buy, if low no profit. It really can become such a balancing act, much like what service stations and supermarkets go through. It pays to have your systems and procedures down and really watch the overheads in high turnover low margin industries.

Regards
John

Dr Greg Chapman said...

John, my preference is not to discount, but rather to differentiate your products and add value in some way to charge a premium.

However, to achieve a premium, you have to do more than display a catalog. Engagement with your customers is essential, something that many online businesses don't do well. An example of this strategy for an online product is at www.IncreaseYourPrices.com.au

Jonny Fay said...

HI Greg,

That is all well and good, but how do you recommend this for commodotised products. For example a supermarket or service station. They all sell the same things and we know it. You can easily compare prices between them.
On engagement, with thousands of customers, that is how online business scale up, by offering the information upfront and pre-empting questions before they arise. Not by answering every query and trying to personalise the interaction with every online visitor.

Dr Greg Chapman said...

Johnny, if the product is a commodity, such as petrol, this is not the strategy you would employ.

Petrol stations, and supermarkets, are really real estate businesses, where location is what drives the business.

This strategy can and does work for online businesses. Having said that, I am not a great fan of discounting at all, but if you are going to do it, do it strategically.

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Dr. Greg Chapman is also the author of
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